Outlook for banking industry remains positive

PETALING JAYA: The outlook for Malaysia’s banking sector remains constructive, underpinned by steady economic growth, improving margins, and prospects for healthy dividends.

Maybank Investment Bank (Maybank IB) Research said it maintains a “positive” stance on the sector, projecting cumulative net profit growth of 5.7% in 2026, up from 4.5% in 2025, with aggregate return on average equity (ROAE) is forecast to edge up to 10.5% from 10.4%

“Moreover, there is the prospect of higher dividend payouts from some banks, in our view,” it noted.

Maybank IB expects the domestic economy growth to hold firm at 5.1% in 2026 against 5.2% in 2025.

Against this backdrop, the research house projects operating profit growth for the banking sector to strengthen to 5.3% from 3.4% in 2025, supported by 5% domestic loan expansion and stable net interest margins.

Still, Maybank IB highlighted potential risks from external volatility.

A prolonged Middle East conflict, for instance, could dampen growth and prompt further interest rate cuts, the research firm said.

“Our economics team estimates that a 10% sustained rise in crude oil price would negatively impact global growth by 0.2 percentage points,” it added.

“A one-percentage-point cut to world gross domestic product (GDP) growth is estimated to negatively impact Malaysia’s GDP growth by 0.8 points.”

The research house said its sensitivity analysis assumes a 50 basis points (bps) cut in loan growth and a three basis points compression in net interest margins (NIMs) across the board, this being the average impact of a 25 bps cut in interest rates to the margins of banks.

It added that such shocks could translate into a 2% and 3% contraction in 2026 and 2027 earnings and a 20 bps and 30 bps cut in ROAEs, respectively.

Still, Maybank IB said dividend prospects remain encouraging.

It said RHB Bank Bhd and AMMB Holdings Bhd could surprise with higher payout ratios, while Public Bank Bhd may do so as 2026 marks its 60th anniversary.

Maybank IB Research expects dividend yields to average around 5.4% for FY26 and 5.7% for FY27, with all banks yielding over 5% except Alliance Bank Malaysia Bhd and Hong Leong Bank Bhd.

Meanwhile, BIMB Research said most banks reported largely in-line results for the fourth quarter ended December 2025 (4Q25), except MBSB Bhd, which missed expectations due to higher provisions.

“Sector earnings softened in 4Q25 as weaker non-interest income offset net interest income gains, leading to a 1.7% quarter-on-quarter drop in total income.”

BIMB Research said annualised net credit costs rose to 24 bps, mainly due to Malayan Banking Bhd’s non-repeat one-off corporate restructuring and provision reclassification, as well as additional provisioning by MBSB.

Despite this, the research firm pointed out that the sector’s cost-to-income ratio remained solid at 45.9%.

For the full year ended December 2025, BIMB Research said sector earnings grew 2.7% year-on-year, supported by stronger net interest income, firmer non-interest income and lower impairments.

BIMB Research said deposit competition was stronger than expected in the fourth quarter of 2025 but appeared seasonal and should ease in 2026.

“Banks remain focused on selective, yield-accretive loan growth as pricing across mortgages, personal financing and commercial loans stay competitive,” it added.

Separately, Hong Leong Investment Bank (HLIB) Research said the sector’s outlook for 2026 remains constructive, supported by a healthy financing pipeline and improving NIM recovery.

“Encouragingly, NIM, in 4Q25, recovery materialised earlier than anticipated, with sector NIM expanding four bps quarter-on-quarter, supported by disciplined yield management and proactive loan repricing,” it said.

HLIB Research expects loan growth momentum to strengthen from January 2026 onwards, underpinned by resilient economic conditions and robust domestic demand.

Collectively, it projects sector earnings to expand by 6.2% year-on-year in 2026, driven by continued NIM recovery and stronger non-interest income growth, particularly from higher fee income.

The research house maintained an “overweight” call on the sector.

HLIB Research said the Bursa Malaysia Financial Services Index appears undemanding, trading at a calendar year 2027 price-to-book ratio of 0.95 times, about one standard deviation below its five-year mean of 1.07 times.

“With more banks implementing capital optimisation strategies and committing higher dividend payout, we anticipate a potential sector re-rating driven by improved return on equity and stronger dividend yield prospects,” it said.